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Guaranteed Income for Life - Annuities Can Make Sense
If you are retired and looking at options for converting your RRSP or require more income from your GICs, an annuity may be the right choice. Canadians today are living longer and enjoying a healthier and more active lifestyle than ever before. They are also worried about market fluctuations and realize that a downturn can have a negative impact on their income. Fewer people today have access to defined benefit plans, and investment risk is being transferred to the employee.
Let’s consider an annuity!
It’s simple – a lump sum investment can provide financial security without the need for ongoing investment decisions
Peace of mind – income will not be affected by changing financial markets or interest rates.
Tax advantages – for non-registered annuities, income can be very tax efficient.
What is an Annuity?
An investment that provides a guaranteed income
- In exchange for a lump sum investment, a financial institution (usually a Life Insurance company) provides regular income payments
- Payments can continue for a choice of:
- one or two lifetimes
- a specified period of time
- Payments contain both interest and a return of principal
Single life annuity
- Pays you income for the rest of your life and usually has a minimum pay period of 5 to 10 years or to age 90.
Joint life annuity
- Pays income for your life and your spouse’s life after you die. It can also have a minimum pay period.
Term certain annuity
- Provide a guaranteed income for a pre-selected period of time
The amount you receive is based on a number of factors.
- Amount of money invested
- Interest rates at time of purchase
- Age and sex of annuitant
- Length of time annuity payments are to be guaranteed
- Type of annuity (e.g. Life or Term Certain)
The taxation of an annuity is also favourable if it is a non-registered plan.
If you are converting a RRSP or RRIF the full payments to you are taxable. However in a non-registered contract most of the payment is considered return on your capital so a high percentage is tax free.
There are two types of non-registered life annuities, prescribed and non-prescribed.
Prescribed annuities average the tax over the life of the contract so each year it is the same. Non-prescribed has the taxation larger at the beginning and goes down over time.
Obviously there are advantages and disadvantages of annuities, the one disadvantage being you cannot change your mind once established and at least past age 90 there is no money left for the estate. There are newer versions now that allow cash back after certain years but the payout is lower. The biggest advantage though is peace of mind and knowing you can never out live your income.
A little known concept in investment planning is a ‘life insured annuity.” For anyone that is taking interest only income from a GIC and has no intention of touching the principle this idea could be for you. The process is quite simple.
Purchase a life annuity with a zero guarantee and back it up with a life insurance policy for the same amount. In some cases you can double your after tax income and because you have ‘life insured” it, your estate receives the full principle when you die.
I can easily show you on paper how this works, you would be amazed at how much more income you can receive at no loss to your estate.
So consider an annuity.
It is an attractive income generating investment:
- Dependable, guaranteed income
- A simple, management –free investment
- Tax advantages
- Payment guarantees
- Income protection for your spouse
- Gradual inheritance transfer for your heirs
SPEAK WITH YOUR ADVISOR
For a thorough evaluation of your insurance needs, please speak with our advisor.